ACUMA Seeks to Navigate a New Path for CUs Through Unfamiliar Terrain

LAS VEGAS -- The American Credit Union Mortgage Association wanted attendees at its 2010 annual conference to walk away with two convictions. First, that the ongoing changes that are moving through the U.S. mortgage market in the past two years have created opportunities for credit union mortgage lenders. Second, credit unions need to educate themselves and change their mortgage operations to seize those opportunities.

"Attendees will go away with a solid grasp of the pulse of the market," said ACUMA President Bob Dorsa. "They will understand the kinds of mortgage loans consumers need, the kinds of consumers who are in need, and the most profitable ways to deliver the products and best serve consumer needs."

One indication of how many changes have moved through U.S. mortgage markets could be seen in the conference's first three speakers, all of whom sought to explain and clarify the current situation in three separate and vital mortgage markets.

Tom Millon, CEO of the Capital Markets Cooperative, a firm that helps credit unions and other financial institutions manage risk while marketing their mortgages in the secondary markets, reassured CU executives that that there is still a market for high quality jumbo mortgage loans.

Jumbo mortgage loans are those which are too large to conform to the mortgage underwriting guidelines used by secondary mortgage market. They have widely been perceived to have fallen out of favor as real estate prices have declined and the secondary market for mortgages that do not conform to Fannie Mae and Freddie Mac guidelines shrank dramatically.

Millon told the executives that while the overall market for jumbo loans was probably only half what it was a few years ago, there were still banks, particularly well-capitalized regional banks, interested in buying the loans, provided they are very high quality.

He also noted that the rise in so called strategic default, where some mortgagees have begun walking away from mortgages, has lead to a re-emphasis on the collateral parts of loan underwriting.

"The rise of the strategic defaulter has heightened the importance of understanding the underlying real estate market," Millon said.

Millon couldn't cast much additional light on the pressing questions of what might come of Fannie Mae and Freddie Mac. The two organizations, which the federal government took over and bailed out after they almost failed in 2008, have been the focus of much criticism and uncertainty as it has been unclear what role the U.S. government may play in the mortgage market going forward.

Millon characterized the idea that the formerly government-sponsored entities would be reconstituted, even under another name, as "almost impossible," but he said the picture of what might take their place was not clear and would not likely become clear for a while.

"I expect that there will be a lot of talk in Washington over the next two years [about reforming Fannie Mae and Freddie Mac] but not a lot of action," Millon said. He said that while he couldn't read the future, he believed that eventually there would be some sort of organization in the secondary mortgage market where investors would take the first losses if anything went wrong but where the government made some sort of explicit, limited guarantee.

Millon told the executives that he thought this way because the advocates of keeping the government entirely out of the mortgage markets had not figured out how to address a central problem: the banks that would be expected to take over that role absent the government lack both the capital and the appetite for risk that the job would require. "The banks just don't have that sort of capital," Millon said.

Teresa Bryce, CEO of Philadelphia-based Radian Guaranty, a leading private mortgage insurer, told the conference that the bulk of foreclosed and otherwise distressed properties continued to impact the overall market for both refinanced and new mortgage loans.

Bryce said the large volume of mortgage refinances that many CUs are seeing only constitutes a "boomlet" compared to previous refinance market surges and said that fully 46% of property sales so far this year have been of foreclosed or otherwise distressed properties.

She likened the ongoing mortgage market and current market conditions as trying to accelerate with two flat tires. Continued weak job markets and the "unusual uncertainty," to quote Federal Reserve Chairman Ben Bernanke, meant that mortgage demand would likely not rise despite the historically low interest rates. She also noted that the decline of the federal home buyer tax credit had also wound up softening the mortgage market this year.

Following Bryce, Jim Gillespie, CEO of Coldwell Banker, one of the nation's largest real estate firms, gave a spirited defense of that home buyer tax credit and an overall optimistic view of the real estate and mortgage markets.

Gillespie told CU executives that while he did not defend all the spending decisions the federal government made, the new home buyer tax credit had been a wise expenditure.

Some economists and pundits have criticized the homebuyer tax credit for not bringing new buyers into the real estate market.

But Gillespie said that research from Coldwell Banker and other firms had shown that every home sale added between $50,000 and $60,000 into the local economy where the sale was made and that the National Association of Realtors has data demonstrating that every home sale added one job in the local community over the following year.

Gillespie also noted the program has helped stabilize home prices, keeping thousands of Americans from slipping underwater on their mortgages or having to accept foreclosure.

He also strongly defended home ownership as part of what Americans have largely defined as the American Dream. This is the notion of a home as a place Americans can own, change as they like, have a yard, start and rear their families and is a deeper meaning of home ownership than real estate as an investment, Gillespie said.

"It's that idea that is coming back to the fore again in the wake of the housing finance crisis the country has been through," Gillespie added.